Hello, ladies and gentlemen, thank you for standing by for NIO Inc.'s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. And I will now turn the call over to your host, Mr. Rui Chen, Director of Investor Relations of the Company. Please go ahead, Rui.

Thank you. Good morning and good evening, everyone. Welcome to NIO's third quarter 2020 earnings conference call. The company's financial and operating results were published in the press release earlier today, and are posted at the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, VP of Finance; and Mr. Jade Wei, EVP of Capital Markets and Investor Relations. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP financial measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, go ahead, please.

Hello, everyone. Thank you for joining NIO's 2020, Q3 earnings call. In the third quarter of 2020, NIO delivered 12,206, ES8, ES6 and EC6, representing a strong growth of 154.3% year-over-year and 18.1% quarter-over-quarter. In October 2020, we delivered 5,055 vehicles achieving another monthly delivery record. ES6 has been the fastest selling electric SUV in China for 13 consecutive months. ES8 has reached the number one in sales this year in the premium electric SUV segment, priced above RMB400,000 in China. Our third product EC6 has started the deliveries in September. We have gained and maintained a great word of mouth reputation for our product quality and service and continuously received positive feedback from our users. In the 2020, China new energy vehicle experienced index released by J.D. Power in September, NIO has once again ranked highest in any new vehicle quality among all brands. After the launch of the battery as a service or product, NIO's products and the services have been increasingly accepted by more users. The new order intake in October broke the historic record and exceeded our expectations. In the fourth quarter, we're confident that the deliveries will further grow to between 16,500 and 17,000 units. In terms of a gross profit, supported by the steadily growing quarterly deliveries, increase of higher margin products in our product mix, as well as continuous improvement on material cost and the manufacturing efficiency of a gross margin in the third quarter has continued the upward trend with the vehicle margin and overall gross margin reaching 14.5% and 12.9% respectively, surpassing of our previous expectation. NIO's existing efficiency is getting more and more self-evident. The operating loss has further narrowed to RMB946 million in the third quarter of 2020, representing 18.4% decrease month-over-month and a 60.7% decrease year-over-year. In addition,…

Thank you, William. I will now go over our key financial results for the third quarter of 2020. And to be mindful of the length of this call, I encourage listeners to refer to our earning press release, which is posted online for additional details. Our total revenues in the third quarter were RMB4.5 billion, or $666.6, representing an increase of 146.4% year-over-year, an increase of 21.7% quarter-over-quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the third quarter were RMB4.27 billion or $ 628.4 million, accounting for 94% of total revenues in the quarter. It represented an increase of 146.1% year-over-year and an increase of 22.4% quarter-over-quarter. The increase in vehicle sales year-over-year was primarily due to the increase in sales of ES6 and ES8. Other sales in the third quarter was RMB259.2 million or $48.2 million, representing an increase of 157% year-over-year, an increase of 11.3% quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to increased revenues derived from the home chargers installed, service packaging and energy package subscribed and accessories sold, which was in line with the increased vehicle sales in the third quarter of 2020. Cost of sales in third quarter was RMB3.94 billion or $580.3 million, representing an increase of 91.4% year-over-year, an increase of 15.7% quarter-over-quarter. The increase in cost of sales year-over-year was mainly driven by the increase of delivery volume in the third quarter of 2020. Gross profit in third quarter of 2020 was RMB585.8 million $86.3 million, representing an increase of RMB874 million from a gross loss of RMB201.6 in third quarter of 2019, an increase of RMB282.7 million from the second quarter of 2020. The increase in gross profit was mainly contributed by increased vehicle sales and increased vehicle margin.…

[Operator Instructions] The first question we have is from the line of Tim Hsiao from Morgan Stanley. Your line is now open.

Hi, Will and Steven, Jade and Tim. This is Tim from Morgan Stanley. Congratulations on a strong result and thanks for taking my questions. So I've two question and we'll quickly go through them and in mandarin first. So my first question, we saw NIO making solid operational progress this year at all fronts for example, like in the launch of EC6, BaaS and 100kWh battery pack. So looking to 2021 in addition to the fourth model launch and ongoing investment in autonomous driving, what else would be our key focuses for R&D investment? And if possible, could the management share any rough guidance regarding the overall R&D spending versus 2020? My second question is about BaaS, battery-as-a-service. Could you please share some market feedbacks on the battery-as-a-service program? And with the launch of the 100kWh battery pack, what's our expectation of the take rate of bus services for 2021 and beyond? These are my two questions. Thank you.

Thank you for your question. Regarding the R&D focuses for next year or over recent focus, just like I mentioned in my prepared remarks. The NP 2.0 is the focus in terms of the core technology. The core of NP 2.0 is the industry leading mass production autonomous driving system. Of course, we also have other ongoing projects. In terms of the vehicle models, we have already successfully launched the three SUV. For the next product that we're going to launch is going to be a sedan on the NP 2.0 platform. It means that we're going to enter the sedan market. At the same time we are also developing other vehicle models. For example, the second new product in the pipeline is also going to be a sedan. So with the launch of the next two new products, we believe we can complete our product portfolio. In terms of the BaaS take rate, after we announced BaaS in August, we're very happy to see the increase with the take rate every week. And in November, we can see that among all those new orders the take rate of BaaS is around 35% which is a factor and better than our previous expectations, because of a model is made to order. So this will be reflected a little bit later in offer deliveries. We are very happy to see this BaaS take rate momentum and we believe that it is also going to improve in the future. BaaS can help us to lower the initial purchase price and [Indiscernible] the users' concerns regarding the battery's degradation and also provide a flexible upgrade services to the user. The purpose of BaaS is to convert more gasoline current users to EVs. After the launch of a 100kWh battery pack, we believe the competitive of BaaS has been significantly enhanced. And as the users can get much better understanding about the benefits of a BaaS, we believe the take rate will increase in the future in the long run.

Perfectly clear. Thank you, William, and congratulations again on your results. Thank you.

Thank you.

Thank you. And the next question we have is from Ming Lee from Bank of America. You may now proceed with your question.

So, my first question is regarding the margin expansion from second quarter to third quarter your gross margin increased around 5 percentage points. Could you give a rough breakdown how would you improve your gross margin? And do you also see any extra contribution from the sales of NEV credit. So that's my first question. Thank you, William.

Hi Ming, this is Stanley. The vehicle margin increased in Q3 compared with Q2 mainly contributed by two factors. The first is the average selling price increased by RMB10, 000 per vehicle, mainly because the more ES8 with higher price are sold in Q3. The second is bond cost reduced by RMB7,000 per vehicle, which are contributed by the cost reduction of battery pack and also EDS. You mentioned the revenue from NEV [ph] credit funds, we received the revenue in Q4 which total amount of RMB120 million, and we will recognize this as other revenue in Q4. So in Q3 we'll not include it in the financial results. Yes. So, that's your question about the vehicle margin. Regarding the service revenue, I think we are continuously working on to improve the service margin to reduce the loss. So, I think the trend will be positive in future.

Okay. That's it for me.

Almost speaking regarding the gross margin for other service and the sales, we believe it will be further optimized as our user base continues to expand, and this is going to be reflected with the growing economics of itself. In the Q2 and the Q3, the change is not very evident, but we are quite confident that this is going onto has a continuous optimization in the future.

[Foreign Language]

Hi Lee, I think your line got dropped.

Sorry. The participant's line got disconnected. [Operator Instructions] I'll move on to the next one. We have Bin Wang from Credit Suisse.

Operator, let the management answer the question first.

Sure, sir. Please go ahead.

Just to recap a little bit on the question. Basically the question is about the average selling price in the fourth quarter is into that the average selling price will increase compared with the third quarter by around RMB12,000 to RMB13,000. So we would like to know whether it is driven by its effects or the 100kWh battery pack. And we also would like to know whether the battery packs what is the take rate ratio between the 100kWh battery pack and the 70kWh battery pack?

In terms of the sales revenue guidance, we are delighted to clarify a little bit just like as Stanley mentioned, for the due credit to revenue, this is going to boost the revenue for the other sales. And in our guidance, we don't actually consider the increase of the average selling price as part of the target. We believe the average selling price in the fourth quarter is going to be at the similar level as the third quarter according to the orders we receive right now. And we just started the deliveries of the 100kWh battery pack in the fourth quarter, so we believe that this is not going to have any impact on the gross margin in such a short time, but we're very confident that we continuously improve our gross margin throughout the fourth quarter.

Operator, we can move on to the next question.

Certainly sir. The next question is from Bin Wang from Credit Suisse, your line is now open.

Actually, I just want to know what's the margin effect is in the BaaS going forward? We see a few patterns for example of BaaS adoption, 100kWh battery and some move off interest rate subsidy for the previous different battery. And it will affect us for impact a margin in the BaaS. Second about the new products, because we've seen the two players who have benefiting likely to be lower pricing or maybe lower margin. So is there any plan for an even bigger SUV or even bigger one because, for example, maybe the name is the ES9, we've seen the peers actually running for much bigger one? So basically what's the upcoming time for even bigger products? Thank you.

I will break down into the sector to further explain the costs value improvement. The first we mentioned is about the subsidy. We further reduced the subsidy to the end users into Q3 with the launch of our BaaS model. And so in Q3 there's a little bit like sector can like due to the subsidy reduction. And second is the scale of the economy. As you can see, the production volume in Q3 is 12,000 vehicles and almost a 20 over 20 increase compared with Q2. As William mentioned we invest more to improve our production capacity in September to 5,000 units. So the manufacturing cost I think almost all the same with the second quarter. But about the BaaS and also the 100kWh impact on I'll turn it over to William.

I would like to add some points regarding the manufacturing cost and efficiency. In the long run, of course, we will further increase our manufacturing efficiency and cost. And we believe this is going to reduce gradually, but we're going to stop with the reduction at a certain point. Of course, we can see more contribution in the third quarter compared with the second quarter, but this is going to diminish in the future. But we will continue to work on optimization of the manufacturing efficiency in the cost. For the battery-as-a-service, we will sell other cars to the users and the battery to the battery as a company on BaaS model. So it means that this is not going to affect the vehicle gross margin, but we saw the battery upgrade the service, this is going to provide some good benefits to other revenue. So in the long run, this is not going to have any significant impact on the vehicle gross margin, but it will give some incentives to other revenue. For the due credits, we actually include this in other revenues or other sales. We have different approaches compared with Tesla, because Tesla consider the revenue after the credit in the vehicle market. But we include that in the other revenue. For the new product planning, we have a very comprehensive product and the market entry planning. This is going to be carried out step by step. For example, we started with other flagship SUV ES6 in mid and large segment then we entered the mid-sized SUV segment with the ES6 then the Coupe SUV with the EC6. This is a very systematic approach. So the next step we're going to enter the sedan market. When electing different market segments, we need to balance the size of the segments and the volume objectives. At this moment the rich market are not going to be our focus.

I think, you also mentioned the one-time factors in Q3. We did not receive significant like sales rebates from the suppliers in Q3. So I don't think we have also the material on factors.

Okay. So, can you also answer me about 100kWh battery, whether that were improving your margin? Also, I think in this call, you also mentioned about 150kWh battery are coming. So did you see that margin for upside from a battery upgrade?

For the 100kWh battery pack, the users can purchase the battery pack as an option which is going to improve the vehicle gross margin, but at the same time, we also provide the flexible upgrade which can contribute to the gross margin of our services and sales. These are two different stories and approaches. After the launch of the 100kWh battery pack, we have seen some users choose to include the 100kWh battery pack as an option. And at the same time we also provide the flexible upgrade so we also have some users opt to the flexible upgrade by month or by year. We believe this is going to improve the gross margin of the company. But in terms of the new car gross margin or new vehicle gross margin, we think it's not going to have a significant impact, but in the long run this is going to give us some boost to the gross margin after the other sales and revenues.

Our logic for this approach is basically the 70kWh battery pack that can meet the daily needs of the user and if the user can make to travel for long distance then they can subscribe to the bigger batteries or the batteries with higher density or capacity. Users can choose to the facility on demand. This is quite flexible and this is the advantage of our service. We believe this is going to contribute to the possibilities of gross margin growth in the long run and the primary pack is going to provide a very good opportunity for us to improve with the gross margins among the existing users and this is a very unique advantage of our business model. So 100kWh battery pack or the future bigger battery pack can in the end, improve the attraction of the 70kWh battery pack, because the users of the 70kWh battery pack will have the opportunity to upgrade the battery pack on demand. They don't actually need to have the 100kWh battery pack or 150kWh battery pack right from the beginning, they can just use the 70kWh battery pack to meet their daily usage needs. Then when it made it, they can upgrade to the bigger batteries. And we believe that this is going to significantly improve the competitiveness of our 70kWh battery pack.

Thank you.

Thank you. [Operator Instructions] The next one is from Edison Yu from Deutsche Bank. Your line is now open.

Thanks, everyone for taking the questions. First, can you talk a little bit about the operational plan to boost the production target in January? What needs to get done to design the ground? And then secondly, as it relates to the next-gen autonomous platform, can you talk about your latest thinking in terms of in-sourcing the chip design maybe the implications for Mobileye and their relationship and how you think about the use of LiDAR?

We have always been emphasizing on the overall supply chain production capacity, not just about the production capacity of our own plant. We would like it to work together with all the supply chain partners to make sure they can support us to boost our production capacity. The users right now will need to wait for some time to pick up their parts, because of the production capacity constraint. We are also trying to speed up the delivery to satisfy the users demand. So right now, we're working on our own firm's production capacity expansion, and also working together with the supply chain partners to improve their production capacity. We're very confident to be able to improve our production capacity to 7,500 units. The second question is about the chipset of the NP 2.0. We understand this attracts a lot of attention in the industry and in the market. But we still need some time to disclose the specific information at the NIO Day 2020. It's still too early for us to share information. Of course, we have already made over decision internally. We believe we should be able to provide the most advanced chipset with the best performance in the industry, and this can help us to guarantee of a leading position in the industry for the coming years. For the LiDAR question, I would like to share some thoughts on the autonomous driving directions first. When thinking about autonomous driving, we should evaluate the two aspects. The first one is how much time we can free up for the users. This is a question of the availability or usability. The second question is, how many accidents can we prevent with autonomous driving system, this is a matter of reliability. So we need to think about the two aspects. When we evaluated the strategy of autonomous driving, we believe LiDAR should be able to help with both aspects. This is a very simple math. But we will need to tackle the issue of cost when it comes to LiDAR and we need to balance this out resolve for product and strategy. In the future with the improvement of cameras and compute powers, we do believe that LiDAR can play a role in some cases and the domains, because they can help us to reduce the accident rate in some corner cases. So LiDAR is a very good addition to the technology competence. If a company could use this interest first, then they should find ways to tackle the technical issues in terms of cost and performance.

Thank you. We have the next question from Nick Lai [ph]. Your line is now open.

Let me translate my question very briefly. The first question is regarding the cash burn and CapEx and investment in the next one year. For instance, William just mentioned our monthly capacity can ramp up to 7,500 in January. And would that mean that in the next one year or so, we need to expand our capacity at the Shanghai plant? On top of that, how should we think about the CapEx needed to build a swap station as well as NIO Space? So the first question is about cash burn and CapEx related. And second question on longer-term autonomous driving solution or strategy. Based on what William commented just now, is it correct to understand that, our long-term strategy is to procure chip from top vendor, but at the same time, we will do most of the offers and capability or solution in-house. Thank you.

So Nick, we have got to the CapEx to improve our production capacity. Most of the CapEx will be covered by January. Of course, NIO will then very useful CapEx on our own, but they draw the revolver [ph].

Yes. And we also will have more in the expansion of sales and service network, and also the power swap station, but we will manage well with the progress. So I don't think there will be a very big, big cash burn in I think next year. So yes, that's about the question about the CapEx.

Of course, for the current development of plan and the cash positions, we believe we have no need for financing in the short-term. We should be able to have sufficient resources to support the business development of the company. With respect to autonomous driving direction, our objective is to build in-house full stack capabilities for autonomous driving. Of course, we have always had this capability in our company in-house. Recently, we have even enhanced our capabilities in terms of the algorithm and system development, starting from 2016 we have developed the NIO Pilot first regeneration by ourselves in-house. But for the first-generation NIO Pilot, chipset is closely bonded together with the algorithm. For the second-generation NIO Pilot, we would like to make sure we can have the in-house capabilities expect in terms of the algorithm data and the system development.

Thank you.

Thank you. We have the next question from the line of Jeff Chung from Citigroup. Your line is now open.

So my first question is about first quarter next year sales volume outlooks. Whether they can still expand Q-on-Q? Second question is about the differences between vehicle GP margin and non-vehicle GP margins growth, outlook and forecast Thank you.

Thank you for your question, Jeff. It's very early to provide the guidance for the first quarter of the 2021. Of course, we need to be fully prepared in terms of the production capacity to make sure we can meet to the usage months and the order backlog. According to the current order momentum and the current backlog, we will need to have a sufficient production capacity for the first quarter for next year to meet the order backlog right now. So in our company our business model is magnitude order so we guided to focus on the labor and others. For other companies, as they talk about the inventory levels, but we focus on the order level. We would like to control the order levels within a reasonable range, so users don't need to wait for long time to pick up their car. We would like to improve our production capacity to make sure we can control the order level within by month. It means from the order placement to the user delivery, the lead time should between three to four weeks, then we can achieve good user experience. At this moment, we still need a long time to meet to these targets, but we will need to ramp up our production to make sure we can improve for the experience and the work quite confidently to achieve this target in the future. The gross margin has been on the rise. In the past we have witnessed a consistent trend that is the non-vehicle gross margin is lower than the vehicle gross margin in the past few quarters. So we have the thing, both the vehicle gross margin and the non-vehicle gross margin have been increasing. Since like I had mentioned the carbon credit, the revenue will be included…

So my last two questions is about the carbon credit. Will it be impacting on our P&L next year in 4Q as well, rather than spread evenly throughout the fourth quarters? This is number one. Number two is about the tax rate on our NoP and BaaS, right now and going forward. Thank you.

The confirmation of the carbon credit revenue is quite flexible. We are not going to put the revenue confirmation in a specific quarter next year, because this depends on the specific market conditions. If we sell too early, maybe it's a little bit too cheap. For the BaaS take rate, just like I mentioned in November, the take rate of a BaaS has reached to 35% among the new orders. Going forward, we believe this is going to further improve in the long run and the take rate of the NIO Pilot is around the 50%. After the launch of Navigate On Pilot, we believe that this is going to have a much better performance.

You have the next question from the line of Nae Yi [ph] [indiscernible] Securities. Your line is now open.

Hi, thanks for taking my question. Great quarter, guys. My question first is could you please comment on your start about Tesla's made in China model Y. Will it impact your order momentum? And secondly, could you please give us some updates on your internationalization plan? For instance, do you have a timetable for multiple steps of going global? Where could be your stock market? What kind of models are you going to introduce to international markets? And how to hire a local and competent team?

Thank you for your question, Nae. Tesla has officially announced that they're going to have a local production of the model Y. We believe that this is actually good for the users, because if we have more options for the users, this can help us to accelerate the popularization of the EV in the market. Of course, we believe the Tesla's strategy is quite different from NIO. Starting from last year, Tesla has cut their price multiple times. And they basically have the pricing strategy based on the cost. At the end of last year and the beginning of this year, their price cut has affected for about one week. But afterwards, over order intake bounced back very quickly. After this price return, they also had several rounds of price cuts the most recent one is around October, 1, the price cut is around 10%. We didn't see any specific impact on over order intake. Actually, in October, our order intake has broken the historic record and exceeded our expectations. Our transaction price is around hundreds of thousand RMB higher than Tesla's average selling price. So we believe that this proves that we have our own unique advantages with our products and services. Model Y's introduction to the China market is going to be beneficial for the overall market. But we believe the competition is more about the competition between model Y and the model 3, because we have our own unique advantages regarding our products and services. For the market situation, basically, we believe the pie is growing bigger, and our main competitors in this market should be the gasoline parts. The China premium market is a very big market with the volume of millions. And this gives us a great confidence that we can have a sustainable growth in the long run.

This is Steven. I'll give you some high-level update of our globalization efforts. First, we have a very concrete short-term target that is we enter EV market in the second-half of 2021. At the same time, globalization team of their long-term vision for NIO, so NIO is a global brand and we'll be very patient to implement this strategy step by step. And so we have three principles. First, we will stick to our users and the price model. We believe it's our global and universal philosophy. Second, we will repeat our premium brand positioning through our key competitors, BMW, Audi and Tesla. Third, our close end service must be localized to the European customers' needs. That's the update of our good efforts.

Perfect. Thank you.

Thank you. That will be the last question for today. I'd like to turn the call back over to the company for closing remarks.

Thank you again for joining us today. If you have any further questions, feel free to contact NIO's Investor Relations team through the contact information on our website. So this conclude the conference call. You may now disconnect your lines. Thank you.

Thank you, everyone.

Thank you, everyone.

Thank you, everyone. That will conclude our conference for today. Thank you all for participating. You may now disconnect.